Mecardo Analysis - How bad was last week in the greasy wool market?

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By Andrew Woods | Source: AWEX, AWC, AWRAP, ICS

Key points

· The falls in greasy wool prices last week were concentrated in the 19 to 22 micron categories

· The broad merino categories have been boosted by low supply for the past 18 months and demand appears to be finally reacting

· In proportional terms, the week on week fall in price was in line with other strong falls seen during the past three decades

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For the 19 to 22 MPGs last week's fall in price were the largest in absolute terms since 1991, after the fall of the Reserve Price Scheme and the following volatility through to the spring of 1991. In proportional terms, the fall in price of 6 to 7%, ranked 14th since 1991 for the 19 MPG and 9th for the 21 MPG. The price effect was not even across different categories of wool, a point this article focuses on.

There were some categories of wool where demand disappeared last week, such as badly drought affected wool from northern NSW. In a fast moving downward market, demand for non-core wool categories often weakens more than the bulk of the market as the buy side tries to work out what is going on.

Figure 1 looks at the average price last Thursday for combing fleece (greater than 50 mm in length) which is sound and has no subjective fault, running from 14.5 to 40 micron. There is a lower yield filter used in extracting this data so it will preclude very low yielding fleece wool. The price series from last Thursday is compared to the July Average, all eastern Australian wool.

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As a rule, short staple length prices did not fall as much as the longer length fleece wool prices and cardings had a good week with the Merino Cardings indicator closing up by 4.4%. The incorporation of the shorter staple wool (on a weighted basis) into the price averages softens the falls seen last week. What shows up is the main weakness in the 19 to 22 micron Merino categories. Our analysis article last week showed that AWTA volumes for 19 to 22 micron fell again in July, so it is not excess supply causing the weakness. That means weakness is coming from the demand side, with the elevated broad Merino prices finally starting to move back to a more sustainable position in relation to other parts of the greasy wool market. The other interesting point from Figure 1 is the relative strength of the 23 micron and broader (crossbred) categories.

Figure 2 (which only runs to 35 micron) shows the change in proportional terms between the two series in Figure 1. The focus of price weakness in the broad Merino section stands out, as does the relatively good week that crossbreds had.

Finally in Figure 3, the top 25 week to week proportional drops in price for the 21 MPG are shown since the collapse of the RPS in early 1991, ranked from highest to lowest. August 2019 is highlighted and sits in the middle. This shows that the price volatility seen last week is not that unusual by historical standards for the greasy wool market.

What does this mean?

All the major apparel fibres have been weakening since mid-2018 in US dollar terms, so the background trend for the greasy wool market is a falling one. Of all the micron categories, broad merino wool has had the largest and most prolonged fall in supply since early 2018. Price has responded but mills cannot process thin air forever. It appears that along with the downward trend in price, the supply chain is also bringing broad merino prices back into line with the other parts of the greasy wool market.

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